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Baidu Profits From Google`s China Exit

Many applauded Google’s decision to stand on principle and stop censoring itself in China at the beginning of this year. Actions have consequences, however, and in this case, Google’s righteousness seems to have strengthened its biggest rival in China, Baidu – a made-in-China search engine whose company is more than happy to embrace censorship.

Google’s attitude seems to have encouraged investors to spend their money on Baidu. But it raises despair in the hearts of those who hoped to see the Great Firewall of China open further. It isn’t just the laws of China that are to blame, however; it’s also the laws of economics. To understand that, it helps to take a quick look at Baidu’s history.

Like Google, the two founders of the Baidu search engine boast graduate degrees from a US university. Founded in late 1999, Baidu was set up from the very beginning to serve the growing Chinese market. Today, that market is even bigger than the US, with 384 million online users and more than twice as many mobile phone users. Baidu quickly claimed a 64 percent share of that search market, which is akin to the share Google holds in the US.

Google didn’t enter the search engine market in China until June 2006, which is about the time Microsoft realized that they needed to take the Internet and online search much more seriously. So imagine that Google is now Microsoft trying to compete against the dominant player. It has the advantage of at least knowing how to do search technology well, but it also faces a strong off-setting disadvantage – its search engine is not well-optimized for the native language of its new target market.

This very point was raised by Rebecca Fannin in testimony to the US Congress before the US-China Economic and Security Review Commission (USCC). She presented her views as an expert on the Internet in China before the bipartisan congressional commission on June 30. She calls the fact that Baidu’s “search technology was considered superior to Google’s in the Mandarin language” a key factor in the battle between the two search giants. Consequently, Google’s retreat from China was “primarily a business decision” because the company realized that it would never catch up there.

On the other hand, Rebecca MacKinnon, who also gave testimony before the commission, disagreed. She pointed out that Google’s 35 percent share of the China market was “nontrivial.” Either way, however, Google’s withdrawal from the market saw Baidu’s stock price rise, reaching a high of $82 in mid-May, more than double the level it was trading at in January before Google’s decision.

Unlike Google, Baidu is eager to stay on good terms with the Chinese government. The company recently received the government’s “China Internet Self-Discipline Award;” MacKinnon noted that this is basically China’s annual award to companies that practice the kind of Internet censorship it wants to see.

With Google’s withdrawal, Baidu is clearly well-positioned to take over an even greater share of the search engine market in China. What does this mean for China’s users? If the award didn’t make that abundantly clear, MacKinnon noted that companies like it “have entire departments of employees whose sole job is to police users and censor content around the clock.” This may be another reason Google chose to pull out of China. In order to stay, the American search giant would have had to add its own censors, an expense which it may have felt could not be justified. Indeed, the expense was so great it caused users in China to lose one small crack in the Great Firewall.